Ali, H. F. 1994. A multicontribution activity-based income statement. Journal of Cost Management (Fall): 45-54.
Summary by Terry Kuhn
Master of Accountancy Program
University of South Florida, Summer 2003
ABC Main Page | ABM Main Page
PURPOSE: To introduce the concept of using a multicontribution income statement based on the ABC cost hierarchy.
IDEA: To compute contribution at 4 main levels:
II. Product-line Level
III. Operations Level
IV. Facility Level
Goal: To help managers assess different levels of profitability and to measure those effects with respect to strategic and operational decisions.
Traditional models of cost analysis:
1. Unit costs
2. Contribution margin
Unit costs analysis is only limited to the product cost and does not give any insight about the contribution of products, brands, product lines, or facilities despite their relevance to management. (p. 45.)
Traditional contribution margin analysis is apparently a short run analysis where fixed cost allocations are ignored. Product contribution margin = Price – Variable product costs.
The use of a multicontribution activity based income statement starts where the contribution margin ends. The concept is to separate fixed costs into the four levels introduced in the beginning of this paper, resulting in a contribution margin at each of the four levels as indicated in the graphic illustration below.
PRODUCT CONTRIBUTION LEVEL (I)
Traditional (or Incremental) Contribution Margin minus
PRODUCT LINES CONTRIBUTION LEVEL (II)
Product contribution minus
Excess capacity costs (overcapacity) is a
key ingredient in the activity based income statement. While the actual machine
utilization is assigned or traced at the product level, any excess capacity costs (the
costs of products the company did not produce) are charged according to usage
intent and the level of machine specialization. (p. 50)
OPERATIONS CONTRIBUTION LEVEL (III)
Product-line contribution minus
Simply put, this means that the costs of marketing and sales operations not directly related to individual products are subtracted out.
FACILITIES CONTRIBUTION LEVEL (IV)
Operation contribution minus
Ali provides an example with four products in two product lines as illustrated in the table below.
|PRODUCT LINE (1)||PRODUCT LINE (2)||TOTAL|
|Product A||Product B||Total||Product C||Product D||Total|
|(-) Variable Unit Based Cost||200,000||135,000||335,000||200,000||265,000||465,000||800,000|
|INCREMENTAL CONTRIBUTION MARGIN||$450,000||$265,000||$715,000||$650,000||$335,000||$985,000||$1,700,000|
|(-) Unit, Batch, and Product-Based|
|(-) Overcapacity Costs - Product||20,000||3,000||23,000||10,000||20,000||30,000||53,000|
|PRODUCTION CONTRIBUTION I||$270,000||$200,000||$470,000||$500,000||$235,000||$735,000||$1,205,000|
|(-) Brand-Sustaining Costs||55,000||175,000||230,000|
|(-) Product-Line-Sustaining Costs||25,000||130,000||155,000|
|(-) Overcapacity Costs-Product Line||5,000||10,000||15,000|
|PRODUCT LINE CONTRIBUTION II||$385,000||$420,000||$805,000|
|(-) Customer and Channel- Sustaining Costs||370,000|
|OPERATION CONTRIBUTION III||$435,000|
Marketing, and Administrative Facilities-
|(-) Overcapacity Costs - Facilities||55,000|
|FACILITIES CONTRIBUTION IV||$180,000|
|Adapted from Ali, Exhibit 9, p. 54|
According to Ali, an activity-based income statement reveals the profitability of units, products, product lines, customers, channels, operations and facilities, providing information for make-or-buy decisions, to drop or keep products, and various other decisions related to improving efficiency and the adoption of advanced manufacturing technologies.